How Traders Make Money: Concentrates Trading
Concentrates trading is often viewed as the most complex type of trading (though I’m sure refined and scrap traders would disagree!). Concentrates trading arguably has the most variables when it comes to generating profits. From QP management and assay exchanges to payables and blending, traders are able to generate significant returns from multiple avenues. However, the most common P&L generator and the most widely discussed in the world of concentrates trading are treatment and refining charges.
Concentrate is the product produced from the first step in the refining process. Ore is mined from the earth and then ground to separate metallic-bearing ore from waste rocks before smelters and refineries convert it into refined metal. Even after this concentrating process, the majority of a concentrates parcel is non-metallic bearing, and needs to be further processed and the metallics extracted. Treatment charges (TCs) and refining charges (RCs) are fees paid by mines to traders or to smelters to cover the cost of extracting the metal from concentrates.
TCs are typically valued in USD/mt and are applied to the entire dry metric tonnage (dmt) of a concentrates parcel. If a trader buys 10,000 wet metric tons (wmt) of copper concentrate with an 8% moisture content, that converts to a dmt of 9,200, against all of which the TC will be applied.
RCs are only applied to the payable percentage of contained metal within a concentrates parcel and are typically valued in US cents/pound. Let’s say that the same 9,200dmt copper concentrates parcel had a copper content of 25% and a payable of 96.5%, then the RC would only apply to 2,219.50mt:
9,200dmt 25% copper contained 96.5% payable = 2,219.50 payable tons.
Not all metal concentrates parcels will be subject to an RC - only ore that requires further refining such as copper will receive an RC. Lead and zinc concentrates only receive a TC.
In simple terms, TCs and RCs can be viewed as a discount - if you are buying concentrates they are a reduction in the cost of the commodity and therefore the amount you are paying. If you are selling concentrates, it is a reduction in the amount you can charge for that parcel and consequently the amount of cash you receive.
It is a trader’s job to buy concentrates at a higher TC/RC than they sell at, i.e. receive a larger discount on their purchase than the discount they give on their sale. If a trader believes that the concentrates market is going to get tighter (less availability) in the future, they may position themselves to be long TCs and contract more physical purchases than sales. If they are correct and the market does tighten, then TCs will reduce and they will make money through buying at a higher TC than they sell at. If, on the other hand, the trader believes that the market will loosen in the future compared to the present day, they may go short TCs, locking in low numbers in the expectation that TCs will increase in the future when there is more availability of concentrates. If they are correct then they will be able to cover their physical sales and achieve a larger TC on the physical purchase. Traders may also be able to take advantage of their size and geographical presence to book purchases and sales at similar times but command a higher TC purchase on one side of the world vs a lower TC sale in a different region, guaranteeing a profit.
Using the above copper example, let’s say that the trader had bought and sold this parcel CIF Shanghai. They were able to achieve a TC/RC of $100/0.10 on the purchase and a TC/RC of $90/0.09 on the sale. Factoring in a small fee for supervision and assaying costs (assaying of concentrates parcels will be discussed at length in a separate post), they would be making a profit of just over $107k. Concentrates profits will often be lower in $/mt terms than a refined metal deal, but the tonnages are usually far larger. Here the trader is making just over $10/wmt, but on a parcel of 10,000wmt that is still a nice day in the office!
Concentrates Trade P&L Table
Those that have been following for a while will notice that the hedge position has been rounded from 2,219.50mt (the payable, copper contained tonnage) to 2,225mt - the nearest 25mt lot. By hedging correctly, the trader does not gain from the increase in the price of copper, but had the price decreased between purchase and sale, the hedge protects them against losses.
The value of TCs and RCs usually reflect the current supply/demand state of their respective markets. If a market is deemed loose, and there is plentiful concentrates supply, TCs and RCs tend to be higher. Smelters have many different options for sourcing concentrates, meaning mines and traders have to increase the discounts they are offering to incentivize smelters to process their concentrates. Conversely, in markets where concentrates are deemed scarce, TCs and RCs tend to be low because smelters have far fewer options to source material from so mines and traders are not obliged to give large discounts to process their concentrates. TCs and RCs are typically agreed on either a spot or long term basis directly between the counterparts involved in the trade. However there are certain trades between miners and smelters that influence the rest of the market - these are known as benchmark trades. For example, in zinc concentrates, the annual TC agreed between Teck and Korea Zinc will set the standard for the rest of the market's long-term deals. For copper concentrates this benchmark is set during negotiations between major Chinese smelters and international miners in Q4 of each year.
